The plaintiff bank gave a loan to a trust at a time when there were only two trustees instead of the requisite three to bind the trust. The bank conceded that therefore the loan agreement and mortgage bond were invalid. The bank sued under an enrichment claim that the trust was enriched to the extent of the balance outstanding of about R5.436 million. The question arose whether the bank’s mistake in not doing an initial proper due diligence of the trust was reasonable under the enrichment action pursued, the condictio indebiti.
The requirements for a claim based on unjustified enrichment are that the defendant must be enriched, the claimant must be impoverished, the enrichment must be at the expense of the claimant and the enrichment must have been unjustified (without cause). Where the condictio indebiti is relied on, the defendant may raise a defence that the mistake made by the claimant when paying the amount was unreasonable and negligent.
On the facts, the court held it would be unreasonable to ascribe negligence to the bank’s failure to perform a due diligence exercise to verify the trust’s capacity beyond the bank’s reliance on the documents provided by the trustees, including a trustees resolution indicating that the two trustees had been duly authorised to conclude the agreement on behalf of the trust. In the loan agreement the trustees declared that “no information that may affect the bank’s decision to approve the loan has been withheld”.
Although the two trustees may have acted in good faith, as trustees they bore the primary responsibility to ensure that the trust complied with all its internal formalities before concluding a contract. The trust acquiesced in the implementation of the loan for five years and purported to perform its contractual obligations in terms of the ‘contract’. The trust paid about 16 instalments amounting to more than R11 million and mortgaged its immovable property as security. That all rendered the bank’s mistake excusable in relying on the representations made by the two trustees.
The court found that the condictio indebiti claim had not prescribed because the bank as creditor did not have knowledge of the facts from which the debt arose until the trustees raised the defence after initially providing the resolutions in support of their representations and performing under the contract. There was nothing that could have alerted the bank to the fact that the loan agreement was invalid until the trustees raised the point in their plea. The prescription defence also failed.
The reasonableness of a mistake in a condictio indebiti claim depends on the facts. The law is well-known that if there are too few trustees acting than the trust deed requires, the agreement is invalid. Those dealing with trusts will not always get away with saying their mistake was reasonable. Anyone dealing with a trust should be careful and get all the information they need to ensure the trustees are empowered to act on behalf of the trust.
On the prescription point, as well, it is a factual question whether a creditor is deemed to have knowledge of the debtor and the debt if they could be acquired by the exercise of “reasonable care”. Here again, reasonableness is the test. That will be a factual issue where it is as easy to fail as to succeed. Take care when dealing with trusts. The facts may not always be as favourable as in the present matter.
[Mhlari NO v Nedbank Limited [2024] ZASCA 39 (4 April 2024)]